A sophisticated investor is one who has amassed considerable experience within the investment community, and is recognized for his or her expertise in matters relating to the selection of investments, accurately projecting market movements, and assessing the viability of newly released stock options. Investors of this type usually have access to significant amounts of financial reserves that allow them to participate in high profile investment strategies. Sometimes referred to as dream clients or accredited investors, brokerages compete for these investors, as they tend to generate more income for the firm that other clients.
While there is some difference of opinion as to what characteristics an investor must exhibit in order to achieve and maintain the status of sophisticated investor, financial stability is generally the basis for any consideration. The investor must possess a minimum amount of net worth, and also have a proven track record over the last two to three years that shows returns of over a certain figure. In order to maintain the status, the investor must continue to maintain that minimum net worth and generate returns in the same general range from one year to the next.
The status of sophisticated investor often makes it possible to be involved in investment schemes that are not within the means of other investors. For example, a sophisticated or accredited investor may be invited to participate in a pre-launch of an initial public offering, or become a part of a venture capital scheme. Since investors of this type normally have the ability to make a long-term commitment to an investment, the ongoing support they can lend to the startup of a new business is extremely important. When the company is established and begins to generate profits, the returns for the investor are usually substantial.
Along with the ability to make a long-term commitment to an investment opportunity, a sophisticated investor can also sustain losses with greater ease than other investors. Owing to the greater net worth required to attain the status, the investor can absorb the loss without placing other investments in jeopardy, or creating any type of financial hardship. The loss can be taken in stride and used as a tax write-off, and the investor continues to search for new investments that will recoup the loss and earn even greater returns. This ability to readily absorb losses and continue strategizing on new deals often means the broker can earn additional fees, a prospect that partially explains why brokers find the sophisticated investor such a valuable client.